Crawford PhD Conference 2014

1. Revenue efforts in mineral producing districts
In Indonesia: is there a resource curse?
Adriyanto Adriyanto
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2. Revenue efforts in mineral producing districts In Indonesia: is there resource
curse?
Background:
Own source revenue at mineral producing districts is lower than non-mineral producing ones.
Following natural resource curse hypothesis, the natural resource endowment may potentially
become disincentive to intensify own revenue effort at mineral producing districts.
Aim:
This study aims to estimate the impact of natural resource endowment on local revenue effort
using econometric approach at mineral producing districts in Indonesia.
There are several reasons motivate to utilize the mineral producing districts:
(i) the natural resource endowment may become disincentive for tax effort as suggested by
previous studies,
(ii) many cases about environmental hazards are found in mineral producing districts
(iii) the revenue effort at these districts is lower than non-mineral producing districts
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3. Research question and Benefit of study
Research questions:
i.does natural resource revenue affect sub-national own tax revenue?
ii.are types of own revenue affected differently? ,
iii.what is the effect of natural resource wealth on revenue effort?.
Benefit:
1.provide background the designation of ecological fiscal transfer for local
government in Indonesia,
2.provide alternative answer for persistent stagnant growth of subnational
tax revenue, which is still limited in literature for Indonesia case,
3.to fill in the gap of study on the effect of natural resource endowment on
revenue effort at sub national level.
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4. Is there difference in resource high districts?
Source: Own calculation based on DGFB data
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5. Country level:
Natural resource curse mechanism: low revenue effort
• The avoidance of broad based taxes lowers
citizen’s demand of better public spending,
lowering political cost and collection cost for
government.
• In the same vein, McGuirk (2013) suggests that
in the presence of high natural resource rents,
leaders lower the burden of taxation on citizens
in order to reduce the demand for democratic
accountability.
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6. Natural resource curse through local
revenue effort
• Sub-national control on resource revenue assignment plays crucial
role.
• The institution quality will affect the extent of potential adverse
effect
• Brosio and Singh (2014) argue that local governments do not have
the same capacity to face the resource revenue related problems,
such as revenue volatility, mobility of factors, the likely
misspending of the rent and on the potential for corruption.
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7. • At local level, some studies find the disincentive effect of fiscal
transfer on local tax effort (see Mogues & Benin 2011, Liu & Zhao
2011, Panda 2009, Rajaraman and Vasishtha 2000).
Author Region Methodology Results
Jha et al (2012) Village level
(Panchayat, India)
3SLS cost of collecting taxes
discourages local tax effort
Liu & Zhao (2011) China provinces Fixed effect Negative correlation between
transfer and tax effort
Mogues & Benin
(2011)
Ghana Fixed and random effect,
Hausman-Taylor estimator
and GMM
Grant discourages revenue
effort
Bacarozza and
Espinoza (2010)
Municipalities in
Sinaloa, Mexico
Fixed effect and GMM Conditional transfer negatively
affecting the fiscal effort
Panda (2009) India provinces Fixed effect and random
effect
Fiscal transfers are negatively
associated with states’
own-revenue
Buettner (2005) German municipalities Regression discontinuity Negative correlation between
grant and tax rat
Rajaraman and
Vasishta (2000)
Panchayat in Kerala
state, India
Pooled data OLS Negative effect of un-tied grant
on own tax revenue
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8. 8
Figure 5: Simplified conceptual framework-between resource revenue and revenue effort at
Sub-national government
Natural
resource
wealth
Non resource
revenue
No role of local
government in
resource revenue
collection
Sub-standard
Economic
performance
The role of local
government in
resource revenue
collection
Institution failure
Revenue
raising capacity

9. Estimation strategy
• This paper uses 302 mineral producing
districts and cities in Indonesia for the year
of 2001 to 2012
• The classification based on: the Decree of
Energy and Mineral resource Minister of
Indonesia number 2300 K/80/MEM/2012
• Mineral includes oil, gas, geo thermal, and
general mining
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10. Data source and types:
Mean Std. Dev Min Max Source
Panel A:
Tax/RGDP 0.0032 0.0059 0 0.130 DGFB-statistics office-
Indodapoer
Charge/RGDP 0.0040 0.0041 0 0.053 DGFB-statistics office-
Indodapoer
Panel B:
Natural resource rev
sharing/RGDP
0.032 0.121 0 3.781 DGFB-statistics office-
Indodapoer
RGDP/Capita 8.11 15.81 0.331 270.80 Statistics office-Indodapoer
Trade, Hotel &
rest/RGDP
.155 .075 0 0.700 District in figure
Forest size (ln) 11.87 1.61 5.455 15.38 District-Province in figure
Population (ln) 12.53 0.96 8.72 15.42 District-Province in figure
Inflation -2.54 0.67 -6.90 2.27 Own calculation
Audit opinion 2.52 0.900 0 4 Supreme audit agency
Fiscal transfer/RGDP 0.412 0.72 0 19.73 DGFB-statistics office-
Indodapoer
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11. Main variable of interest
• Resource endowment:
- Resource revenue sharing from mineral and
fishery (revenue stream)
- Forest size to proxy forestry revenue.
Two reasons (i) revenue sharing from forestry
sector does not reflect the real value due to the
massive illegal logging (HRW 2013, Tacconi 2007,
Wildberg & Carius 2003, see also Lutrell et al
2011, Lawson and Mac Faul 2010, (ii) to capture
the impact of resource endowment reflected by
forest size instead of revenue stream.
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12. Estimation model:
I postulate the following hypothesis:
•HP-1: Natural resource revenue sharing has negative correlation with sub-national revenue
effort
•HP-2: Forest size is negatively associated with subnational revenue effort.
The estimation model:
•Revenue/RGDP= γ0 + γ1 Resource Revenue sharingit + γ2Forest sizeit + γ3 GDP/Capitait +
γ4Trade,hotel and restaurant/RGDPit + γ5 Inflationit + γ6Populationit + γ7 Audit opinionit +
γ8Timedummy2005it+ αi + εit ……………………………(1)
•Revenue/RGDP= γ0 + γ1 Fiscal transferit + γ2Forest sizeit + γ3 GDP/Capitait +
γ4Trade,hotel and restaurant/RGDPit + γ5 Inflationit + γ6Populationit + γ7 Audit opinionit +
γ8Time dummy 2005it+ αi + εit ……………………………………………………….(2)
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13. 13
Ordinary least square (robust standard
error)
District and time Fixed effect with
robust standard error
District and time Random effect with
robust standard error
Dependent variables:
Tax/RGDP Charge/
RGDP
Tax/RGDP Charge/
RGDP
Tax/
RGDP
Charge/
RGDP
Resource revenue
sharing/
Real RGDP
-0.0004
(0.00098)
-0.0017
(0.001)
0.002
(0.0016)
0.0003
(0.001)
0.0017
(0.0017)
-0.00093
(0.0006)
Forest size (Ln) -0.0005***
(0.00016)
-0.0003***
(0.0001)
-0.0011**
(0.0005)
-0.002*
(0.001)
-0.0003*
(0.0002)
-0.0004**
(0.0001)
Real RGDP /Capita -1.67e-06
(0.00004)
-0.00004***
(0.00001)
0.00003
(0.00002)
-1.56e-07
(0.00002)
-2.96e-06
(8.45e-06)
-0.00003***
(0.00001)
Trade, hotel and
restaurant (share of
Real RGDP)
0.010**
(0.004)
0.005*
(0.002)
0.018***
(0.007)
0.017***
(0.004)
0.014***
(0.005)
0.010***
(0.003)
Inflation(Ln) -0.0005*
(0.0003)
-0.00009
(0.0002)
-0.0003*
(0.0002)
-0.00008
(0.0001)
-0.0005**
(0.0002)
-0.0001
(0.00012)
Population (Ln) -0.0006*
(0.0002)
-0.0008***
(0.0002)
0.007*
(0.004)
0.001
(0.0014)
0.00041
(0.00045)
-0.0006***
(0.0002)
Audit opinion 0.0004***
(0.0001)
0.0002**
(0.0001)
0.0003***
(0.00009)
0.0001
(0.00008)
0.0004***
(0.00008)
0.0002**
(0.00008)
Time effect 0.0008***
(0.0001)
0.0013***
(0.00018)
0.00036
(0.00038)
0.0011***
(0.0002)
0.0009***
(0.0003)
0.0014***
(0.0002)
r2 0.056 0.09
F Test 6.59*** 16.05*** 7.77*** 16.07***
Wald chi(2) 60.27*** 132.06***
Observations 2327 2327 2327 2327 2327 2327
Table-7: Panel Data Results with fixed effects

14. 14
Dependent variables: Tax/RGDP Charge/RGDP
Resource revenue sharing/Real
RGDP
0.0036
(0.002)
-0.0011
(0.0022)
Tax sharing/RGDP -0.0009
(0.0022)
-0.003
(0.002)
Un-earmarked Grant/RGDP 0.0014***
(0.0003)
0.004***
(0.0006)
Forest size (Ln) -0.002**
(0.0007)
-0.001
(0.0014)
Real RGDP /Capita 0.00005*
(0.00002)
-0.00001
(0.00002)
Trade, hotel and restaurant (share of
Real RGDP)
0.0143**
(0.006)
0.009**
(0.003)
Inflation -0.0003**
(0.0002)
-0.0001
(0.00012)
Population (Ln) 0.0077**
(0.0038)
-0.0004
(0.0011)
Audit opinion 0.0003**
(0.00009)
0.00006
(0.00007)
Time effect 0.0002
(0.0004)
0.001***
(0.0002)
F test 9.44*** 17.69***
Observations 2239 2239
Table 8: Time and district fixed effect-Fiscal transfer (robust error)

15. Conclusion and policy implication
• This study finds evidence that resource wealth does not become disincentive to
revenue effort . The effect is found for all specification. This implies that this
paper does not find the potential channel for resource curse in mineral producing
districts Indonesia. However, the presence becomes disincentive for revenue
effort.
• This paper finds strong and positive correlation between un-earmarked grant and
revenue effort . This suggests that grant transfer does not become substitute for
local government revenue. Nevertheless, this suggest the likely dependence
upon grant.
• The strong revenue raising capacity is important to ensure quality public service.
There needs broader revenue sources for local government to increase their own
source revenues.
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